RALEIGH (Oct. 7, 2011) – Unemployment benefit payments, which have been instrumental in generating economic activity and supporting businesses and families, are in need of key policy changes in order to return to solvency, according to a new report.

These payments have generated an estimated $23.3 billion in economic activity across the state, said a report released this morning by the North Carolina Budget & Tax Center, helped sustain local businesses, and lent modest support to families who have suffered from job loss. However, North Carolina’s unemployment insurance trust fund was below safe levels even before the Great Recession, due to a series of tax changes in the 1990s that reduced how much employers were required to contribute to the fund. In turn, the fund was already gravely weakened by the time unemployment plummeted and job creation slowed in the wake of the recession.

By expanding the taxable wage base and reforming the experience-based rating system, North Carolina lawmakers could help create an unemployment insurance system that is equitable, sustainable, and helps set the fund on the path to solvency, the report said.

“Given the critical role that unemployment insurance payments play in the state’s economy and recovery, North Carolina needs a financing system that can adequately support these payments and remain stable through the ups and downs of the business cycle—even through a downturn as severe as the Great Recession,” said Alexandra Forter Sirota, director of the BTC and author of the report.

The unemployment insurance system was developed by the federal government to support the economy during downturns by having employers contribute more to the insurance trust fund during periods when payrolls are high, so that the fund can provide benefits to laid-off workers even when those payrolls shrink. This “countercyclical function” of the system is essential to sustaining future economic recovery, the report said.

In order to make the Trust Fund sustainable, policymakers should expand the taxable wage base through better indexing, which would allow financing of the unemployment insurance system to keep pace with the loss of wages. The report also advises adjusting the experience-rating system which determines the level of taxes employers pay based on the number of workers claiming unemployment benefits.

“In order for unemployment insurance to work, workers who have lost their jobs through no fault of their own must be able to access payments and spend them in their community, and employers must contribute enough to the system in good times,” Sirota said. “Moving forward, policymakers must design a system that ensures the counter‐cyclical role of the unemployment insurance system is strengthened and businesses benefit from more stable consumer spending.”

The N.C. Budget and Tax Center—a project of the N.C. Justice Center—seeks to create economic opportunity and shared prosperity for all North Carolinians through non-partisan research, education and advocacy on budget, tax and economic issues.